Suggestions for Angel Investors

I’m on an Acela train between Boston and New York (listening to Boston’s More Than A Feeling – how recursive) on my way to the TechStars Boston 2010 Investor / Demo day. I wasn’t able to make it to Boston yesterday for the Angel Boot Camp as I was running around NYC with the CEO of a company I invested in last week introducing him to a bunch of potential customers and partners.

It sounds like Angel Boot Camp rocked. My long time friend and co-angel investor Will Herman wrote a post titled Angel Investingthat summarized some of his advice. Will is finishing up his 31st angel investment (we’ve done a bunch together – including my very first one – NetGenesis in 1994) and he walks through what he’s learned from 16 years of angel investing. Don Dodge also has a great post up titled How to be an Angel Investor…and make money.

On the eve of the graduation of the TechStars Boston 2010 class, I thought I’d weigh in with some additional advice to anyone who either is or wants to be an angel investor. Some of this repeats what Will and Don said, but I’ll try to be additive (and specific). For context, I’ve made over 75 direct angel investments primarily in two time periods – 1994-1996 and 2006-2007. I’m out of the angel business as all of my investments go through Foundry Group (the VC fund I’m a partner in) but I’m an investor in a number of “super angel funds” as well as a co-founder of TechStars and I continue to regularly make seed investments from Foundry Group alongside of angel investors.

So – here’s the advice:

1. Be promiscuous: To be a successful angel investor, you have to make a lot of investments. I generally made about one investment a month when I was active as an angel. While this pace may not be right for everyone, if you are doing less than four investments a year, I don’t think you are making enough. Play the field – it increases your chance of hitting a monster and it’s a lot more fun.

2. Have a long term financial strategy: Early on I decided that I was going to write the same size initial check in every angel investment. In the first phase (1994-1996) this was $25k. In the 2006-2007 phase this was $50k (although I broke this rule by occasionally doing $25k or $100k and in several cases, even more.) I always assumed I’d double down on each investment before the company either raised a VC round or was acquired (so – when I put $25k in, I was really allocating $50k to the company.) Then, I decided how much I was going to invest over a particular time period. In the 1994-1996 time period I decided to invest $1m in angel investments. So – that gave me capacity for 20 investments (I did more – oops.) In 2006-2007 I allocated more (and did more). However, since I had a time frame and an amount per company, I had a baseline pace that I could go at before I got uncomfortable with how much I was investing.

3. Understand the difference between 0x and 100x: I’ve had two of my angel investments return over 100x each. Since I had a strategy of investing the same amount in each company, all I needed was one 100x to allow me to have 99 companies completely flame out and return 0 and I’d still break even. With two investments at over 100x, I now have a built in gain of significantly over 3x across all of my investments since I’m made about 75 of them and I’m now deliciously “playing with house money” on all of the rest.

4. Choose people over ideas: I have never regretted making new friends through an angel investment that failed. I have always hated working with people I didn’t like, or didn’t think were A+. It’s an easy filter – use it.

5. Decide quickly: My best investments as an angel were made after one meeting and I’ve often committed in the meeting. Sometimes it has taken me longer – usually a second meeting or a long meal. But there’s no reason for an angel investor – especially an individual one – to drag the entrepreneur through a long, protracted due diligence process.

6. Don’t torture entrepreneurs: Remember, you are supposed to be an “angel investor”, not a “devil investor.” If you really want to be a great angel investor, decide quickly and then help the entrepreneur get their financing done! Be a force for good in the universe.

7. Run in a pack: The best angels run in packs. They share deals. They love to work together. They don’t feel obligated to invest in each others stuff, but they often do. And they communicate with each other. If you run in a pack, different people will take the lead role in different cases – sometimes I’d be the lead investor in an angel deal and – with a $25k check pull together a $500k round. Other times I’d just be one of the $25k checks in the $500k round and pawn off the work on one of my friends. Either way, I have a lot more fun playing with others – especially when the companies win!

I’m sure some of these don’t work for everyone so I’d love to hear any criticism from other angels out there. And – feel free to add your own tips, especially about – ahem – working with VCs.

This is an inspiring one, Brad. Thanks.
I still have some mileage to do before running into the angel business, but hey, at least I know where I'm heading…

http://www.facebook.com/jasonnazar Jason Nazar

Really great post Brad, from an entrepreneurs perspective I think 5 is the most important. If you're talking with an "angel investor" that's not prepared to write a 50K check after 2 meetings, its often going to be more hassle than not. Clearly there are exceptions, there are in our deal, but its a helpful rule of thumb as an entrepreneur when looking to raise money.

http://www.secureauthor.com Teri

Brad from the entrepreneurs perspective I enjoyed your article. I hail from the far North, Canada. I find the few Canadian Angels that there are, they are so slow in how they work. I was at a forum a few weeks ago that had a panel of 2 American and 2 Canadian VC's who "dabbled" in Angel Investments. During the discussion it was determined that the American Panelists had a time line from start to actually putting the money on the table was 1 day to 3 weeks maximum the Canadians (conservative lot we are) took from minimum 3 months but more than likely 9 months to make a decision. Whats the use? By that time 10 people have ran with the same idea and have sent out 3 updates to better their technology. We became frustrated with the process and are building our success a bit slower than we anticipated and have 1 interested Canadian Investor… I guess we will see how this pans out.

One more thing, I love the way America does business! You do business and take the necessary risks that makes America the business mogul it is today. So Big Brother, if you come across a Canadian Investor, pass this article to them.

http://intensedebate.com/people/bfeld Brad Feld

Thanks! Yeah – speed really matters. It’s not a Canadian-only problem – US-based angel investors in different parts of the country have a similar slow pace. This is especially pernicious in some organized angel groups or in geographies where a few angels “control” all the activity.

As entrepreneurs, we tend to think #angels don't need help in deciphering "deals" but from experience, it's important they are experienced and master their process as to save time and $ in the process; i.e. like #5 and #6 Thanks for sharing your wisdom!

http://josephsunga.com Joseph Sunga

After reading this post, it immediately made me think of David Lifson at Postling.com — in regards of raising money from angels. All the angels he raised from definitely did #4-7 (not sure about #1-3 since I don't handle their money). Always great to get investor insight and looking forward for TechStars in Seattle.

Thanks for the post, Brad. I'm sharing this with a number of angel investors I've worked with. Echoing Jason Nazar's emphasis on #5, one of the greatest challenges faced by entrepreneurs and angels is optimizing the timing of an angel investment. This is not a problem only on the side of the angels. While entrepreneurs can end up investing a great deal of time — too much time — in capital raising due to extensive due diligence conducted by angels (for a relatively small sum), a lot of times this is also due to the entrepreneur not having the answers to questions posed.

It is perfectly okay for an entrepreneur to answer a question with "We don't know" or "This market is just developing" or "We believe we can accomplish X by Y,"…. but they need to at least have thought through all of the potential questions that most investors will ask. I have seen too many angel meetings where the entrepreneur can't answer certain questions adequately (with confidence and conviction, even if the answer is unknown) which delays the investment process…. because the angel likes the entrepreneur and the product, but has some questions they need answered before they write their $50k check.

http://www.facebook.com/consultski Jeff Ski Kinsey

Most excellent.

Number 4 has been proven time and time again, but too few understand it. The Late Colonel John Boyd (who helped give us the F-15 and F-16, among too many other credits to list) said, "People, ideas, and hardware. In that order."

http://sites.google.com/site/amitkumar0480 Amit Kumar

I would love to hear the stories of your investments that returned 100x. What was too good?

http://intensedebate.com/people/bfeld Brad Feld

One happened very quickly (IPO in 1999) and one took over a decade. Both are very good stories that I’ll try to weave into something.

Brad, excellent post, and is scarily almost identical with my own history (about 80 deals, same investment thesis, same numbers although no 100x exits this decade :-). Like you, I do about one deal a month, so most of my deals have been in post-crash era.

The point you make about portfolio diversification is absolutely critical, and one that most angels actually haven't yet internalized. There have been several good studies and papers showing that in order to get within one standard deviation of the target angel IRR of 20-30%, you need to invest in a minimum of about 20 companies, and after you hit 80 companies it won't appreciably change your returns.

But here's the important question: if you were hanging around New York this week, why the heck didn't you stop by and say hello?! We've got a five floor tech center/incubator/playroom here on top of the Shake Shack, and would be delighted to show you around and introduce you to some killer NYC startups

http://intensedebate.com/people/bfeld Brad Feld

Well – I’m back on Tuesday afternoon – how about something at the end of the day?

Great advice, Brad. People over ideas, act quickly, run in packs — all things I've heard time and again from great angels. Taking a portfolio approach is also critical. While I wouldn't expect most angels to be quite as promiscuous as you were, the numbers I've seen suggest you should do at least a dozen — perhaps twenty — investments to be safe, and you should spread those out over a few years to account for fluctuations in the market. You also want to hold some money in reserve for follow-on investments to avoid dilution.

Sorry you couldn't make it to Angel Boot Camp (and that we didn't connect at Demo Night). But thanks for all your support leading up to the event!

http://www.dresseslife.com dresses

When we were both at Salesforce, I could never understand what Holleran was talking about. I now realize that I just need a pause and rewind button, and now I get it.

http://www.masschallenge.org Amy Tindell

Thanks Brad. The following blog may also be helpful for aspiring angels. It is written by an angel investor, and summarizes advice on how entrepreneurs should interact with angels in order to be successful. A different perspective, but also valuable. http://www.masschallenge.org/blog/bettina-hein-ho…

http://twitter.com/donnawhite Donna White

Even though I am not an angel investor, I recognize plain good sense — this post is packed with outstanding advice that translates into other arenas as well. It was worth the read just for some of the zingers…e.g., angel investor vs. devil investor.

Those are some great tips. With all your experience (If you don't mind) I would really appreciate some feedback on the layout of this page and list of investment opportunities. I'm just wondering if looks attractive enough to bring on potential investors, or if it's laid out effectively. Thank you for your time
here's the link http://theinvestmentreporter.wordpress.com/invest…

http://intensedebate.com/people/bfeld Brad Feld

It’s ok if you have regular new ideas that show up via individual posts. I guess your goal in that case would be to get as many subscribers to the blog as you can.

I have found that most angels are what you would call devil investors. On the other hand there are some definite angels out there that make the process fast and exciting.
In my seminars I tell recipents that and angel will first look for the sex appeal, does it push his/her hot buttons, then they look at the people ( do they like you ) and then the opportunity.

I wish we had more angels down under with your approach.

Regards

Davis Lester Clarke

vengo

Brilliant post Brad.

Provides excellent insights to people who are would-be Angel Investors.

Awesome pointers for starters for sure.

I would recommend everyone to go through this post while they start on their angel investment journey.

Cheers,

Venugopal
Vengo Ventures.

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I would recommend everyone to go through this post while they start on their angel investment journey.